OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 2 Catch-up and Constraints in the Twentieth and Twenty-first Centuries Robert H. Wade 2.1 Introduction The old-style development economists—including Gerschenkron, Prebisch, Lewis, Myrdal, Chenery, Hirschman, Adelman, Seers, and many more—would surely be disappointed by the record of global economic development in the past half century, at least when looking at the slowness of catch-up as distinct from the dramatic falls in global poverty even while population increased at the fastest rate in human history. Gerschenkron’s ‘late development effect’,or‘the advan- tages of backwardness’, seems noticeable more by its absence than its presence, despite new technology being widely available to people around the world and despite no shortage of people with entrepreneurial talent. But perhaps they would not be surprised. At the core of their understanding of the process of catch-up development were the following propositions: (1) Development is a disruptive process of non-marginal changes over time, opposed by many in the society, generating inevitable conflict, and placing a premium on fragile conflict-resolution institutions—a premium which calls for not exposing the economy to unmediated international competi- tive pressures. (2) The price system in a developing country cannot play the role accorded it in developed countries as the major allocator of resources, because markets are too undeveloped and because relying on markets would tend to sustain the existing production specialization based on static comparative advantage with decreasing returns to scale—a point which also implies the desirability of less than full-scale integration into the international economy. (3) Capital being extremely scarce (or was at the time the pioneers were writing and for decades after), the state has a large role in husbanding the mobil- ization and use of scarce capital, on a scale big enough to make centrally planned, non-marginal changes in the production structure towards increasing return activities which may well lie beyond the economy’s static comparative advantage; but it must use mostly decentralized market allo- cation rather than centrally planned allocation (Reinert, 1994). Robert H. Wade, Catch-up and Constraints in the Twentieth and Twenty-first Centuries. In: How Nations Learn: Technological Learning, Industrial Policy, and Catch-up. Edited by Arkebe Oqubay and Kenichi Ohno, Oxford University Press (2019). © Oxford University Press. DOI: 10.1093/oso/9780198841760.003.0002 OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 16 . (4) The social returns to large, lumpy, and risky investment projects typically far exceed the private returns to private investors—which again implies a directive role for the state. 2.2 The Eclipse of Development Economics and the Rise of Neoliberalism As we know, these propositions fell radically out of favour in the international (Western-dominated) development community starting in the 1970s and inten- sifying in the 1980s and later. This was the time of ascendancy of the development recipe that came to be known as the Washington Consensus, but which is more accurately called the Washington–London–Paris–Brussels–Berlin Consensus. Anyone questioning the universal applicability of the Washington Consensus was treated as religious sects treat heretics. Today, many development economists have scarcely heard of Prebisch or Myrdal, or cumulative causation, or Kaldor’s growth laws, and would agree, if pressed, that developing countries should mostly follow static comparative advan- tage and integrate deeply into global production networks with the state providing only macro stability and general supply-side support, including infrastructure, incentives for education (public or private), incentives for health care (public or private), and above all, law and order, protection of private property rights, including the rights of capital owners to move their capital freely around the world. They think of development policy as mostly about the supply side, leaving the demand side to be taken care of by exports—a presumption which conveni- ently occludes questions about whether income and wealth distribution should be made more equal. Why this sharp shrinkage in the legitimate role of the state in the process of economic development? Perhaps for two linked reasons. First, in the West, led by the United States, the success of ‘social democratic capitalism’ during the post-war decades up to the late 1960s squeezed the rate of profit (success in terms of the ability of the labour movement to translate rising productivity into higher wages and of the ability of governments to keep recessions short). Business leaders and the already wealthy began to press for radical reforms intended to restore the rate of profit and reverse the erosion of their pre-eminence in the social structure, hanker- ing back to the golden age of oligopolistic capitalism of the early twentieth century. Fortunately for them a sect of professional economists had long been develop- ing the paradigm which they proudly called neoliberalism, which aimed to secure the same kind of social order wanted by business leaders and the wealthy and banish the Keynesian ‘pro-government-intervention’ ideas prevailing during the post-war decades (Slobodian, 2018). This sect had the good fortune to include OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi - 17 the governor of the central bank of Sweden, a passionate opponent of social democracy. He had the idea of commemorating the 300th anniversary of the central bank by creating a prize to be called the Nobel Prize in Economics (a name which both the Nobel Foundation and the Nobel family initially rejected, so that its official but not used title is The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel. The governor knew he could select the awarding committee members to ensure that the prize went disproportionately to clearly neoliberal economists in order to show the world that neoliberal economics was the best, most scientific economics, in contrast to social democratic economics. The project to remake the world in line with neoliberal principles has been dramatically successful. A New York Times reporter summarized the prevailing belief at the World Economic Forum (of business leaders and politicians) meeting in Davos, Switzerland in 2002: [A] nation that opens its economy and keeps government’s role to a minimum invariably experiences more rapid economic growth and rising incomes. (Uchitelle, 2002) The prominent Financial Times economics editor Martin Wolf described his neoliberal vision of the desirable world order as follows: It cannot make sense to fragment the world economy more than it already is but rather to make the world economy work as if it were the United States, or at least the European Union [meaning that governments of nation states should have no more control over economic transactions across their borders than US states have across theirs, or at least no more than European Union states have across theirs] . The potential for greater economic integration is barely tapped. We need more global markets, not fewer. (2004: 4, emphasis added) In the same spirit, here is Alan Greenspan, former chair of the US Federal Reserve, shortly before Lehman Bros collapsed in 2008: [We] are fortunate that, thanks to globalization, policy decisions in the US have been largely replaced by global market forces. National security aside, it hardly makes any difference who will be the next president. The world is governed by market forces. (quoted in Tooze, 2008, emphasis added) Notice the implied low value attached to national sovereignty and liberal demo- cratic politics which runs through neoliberal ideology. This goes with passionate opposition to measures that curb income and wealth concentration at the top, where the captains of industry live. One of the pioneers of neoliberal economics, Ludwig von Mises, wrote in 1922: ‘Our whole civilization rests on the fact that men have always succeeded in beating off the attack of the re-distributors’ (Slobodian, 2018: 277). OUP CORRECTED PROOF – FINAL, 29/5/2019, SPi 18 . Much later, Robert Lucas (2004), who was awarded the ersatz Nobel Prize, said: Of the tendencies that are harmful to sound economics, the most seductive, and in my opinion the most poisonous, is to focus on questions of distribution . The potential for improving the lives of poor people by finding different ways of distributing current production is nothing compared to the apparently limitless potential of increasing production. Inside the World Bank the break with old-style development economics came with the appointment, by the right-wing Reagan administration, of the former president and CEO of Bank of America, Ted Clausen, as president in 1981; and the appointment, by the same government, of Anne Kreuger as chief economist, who in turn appointed Deepak Lal as her effective number two. These two believed that the state is essentially predatory, because captured by coalitions of interest groups to extract rents from the private sector by suitable regulations, trade and fiscal policies, and, of course, by outright corruption. In this worldview, the process of economic development requires that the state should be active in providing the prerequisites of markets (private property rights, especially the rights of capital owners), but beyond that, should have a closely circumscribed role in the economy so as to minimize predation and let the private sector learn what it needs to learn in order to maximize profits for the owners. Kreuger and Lal set about eliminating economists in their part of the Bank who did not fully sign on, a process Lal described as ‘cleaning the stables’.¹ Across the Bank, many people with industry expertise were fired, or else, to stay in Bank employment and retain US residency and gold-plated pension rights, they rebranded themselves as experts in environment or primary education or good governance. Of course, economists on the intellectual frontiers write papers qualifying the broadly free-market consensus, and enjoy frisking the papers of others.